The instrument is not in the law — yet the Bank of Russia already recommends it. A rare combination, you'll agree.

Phantom shares are gradually entering Russian practice as a way to motivate top managers and key employees over the long term. The business logic is clear: give them an economic interest in the company's growth without handing over shares, a participation interest or voting rights.

Yet despite the growing popularity of this incentive tool, Russian law still does not recognise a legal institution called a "phantom share". The law does not define what exactly its "holder" acquires, what rights arise or what rules the programme should follow. Every programme is assembled by hand, and the legal consequences depend not on the name but on what is written in the documents.

In 2025–2026, however, regulators spoke about the instrument directly for the first time. The result is an unusual picture: phantom shares are recognised in regulatory practice but still have no legal regime of their own. Hence the main practical question: can a Russian company today put together a legally robust phantom share programme — and on which legal rules will it rest?

What a phantom share is — and what it is not

Let's start with the fact that the instrument's name is misleading. A phantom share is not a share within the meaning of securities market legislation. It does not evidence participation in the company's capital and gives its "holder" no corporate rights. A recipient of phantom shares:

• does not become a member of an LLC or a shareholder of a JSC and does not acquire voting rights;
• does not receive the right to dividends and may not dispose of part of the charter capital;
• does not acquire information rights or other rights of a member of the company.

In essence, it is a conditional right to a cash payment calculated by reference to the value of the company, the value of its shares or other predetermined indicators. Economically, the employee gets a result comparable to the growth in value of a shareholder's stake. Legally, no stake, shares or resulting rights arise.

The phantom lives up to its name: the money is real, the rights are ghostly.

This is what fundamentally distinguishes a phantom programme from a classic option over shares or participation interests: the participant gets the economic benefit of the business's growth but does not become a co-owner.

What the regulators have already said — and what remains open

To some extent, the instrument has already been recognised. And this is where things get interesting.

The Information Letter of the Bank of Russia and the Ministry of Finance of 17.03.2026 No. IN-01-28/9 / 05-08-05/21339 expressly provides for the use of phantom shares in long-term incentive programmes. The regulators define them as cash payments equivalent to the current value of the company's shares and immediately point out the downside: the burden on the company's cash flow.

Among other things, the recommendations set out:

• Key indicators. Total shareholder return (TSR) or, if no dividends are paid, market capitalisation. They are set as a target range or minimum growth and reviewed every 3–5 years.
• Programme size. At least 30% of the participant's total remuneration.
• Term. At least 3 years for a short investment cycle, with 5 years as the benchmark and 10 years as the limit.
• When to choose phantom shares specifically. The cash form is recommended if payouts exceed the average daily trading volume of the shares over the last 6 months or if the programme exceeds 5% of the value of the company's shares. The logic is simple: avoid putting pressure on the company's own share price.
• Who approves it. The board of directors regulates how the programme is implemented, and the remuneration committee assesses whether KPIs have been met.
• Early exit. Dismissal through no fault of the employee — payment pro rata to time worked; dismissal for cause — no payments.
• Disclosure. In the annual report: the programme's objectives, terms, categories of participants, KPIs, value, the share of stock involved and the forms of payment.

As you can see, the framework is quite workable. But recommendations should not be confused with full statutory regulation of the institution that the parties could reliably rely on in a dispute. First, they are addressed primarily to public joint-stock companies and companies planning an IPO. Second, the document itself expressly states that it does not regulate the application of employment law.

Yet it is non-public JSCs and LLCs that are most often interested in phantom programmes. For the owner of such a company, giving a real stake to a key manager is not just an economic incentive — it means a new member of the company with all the corporate rights provided by law. A phantom programme avoids that.

The second document is Ministry of Finance Letter No. 03-15-05/58680 of 17.06.2025, in which the ministry considered the taxation of payments to employees under a phantom (virtual) option programme. It settles exactly one question — the tax consequences of the payment. And it does not settle it fully: we analyse the Ministry of Finance's position and the contradiction it contains in detail in the second part. The document does not define the legal nature of a phantom share as such.

What a phantom programme rests on in Russia

In our view, phantom shares can be used in LLCs and non-public JSCs: the absence of special regulation does not in itself amount to a ban. The foundation is the principle of freedom of contract enshrined in the Civil Code — the parties may enter into contracts not expressly provided for by law and determine their terms themselves, subject to mandatory rules. This means a company may undertake to pay money in the future to an employee, manager or other person if pre-agreed circumstances occur:

• growth in the value of the business;
• achievement of financial targets;
• sale of the company;
• bringing in an investor;
• an IPO;
• remaining with the company for a set period.

A phantom share is therefore more accurately seen not as a special corporate right but as a contractual mechanism for determining the company's future monetary obligation to an employee.

The difference is not theoretical. The content of a corporate right is defined by law; the content of a phantom share is defined only by the programme documents. What the number of phantom shares granted to an employee means, when they become "earned" and at what point the obligation to pay arises — all of this has to be written down by the company itself.

Nor can a phantom programme be assigned to a single branch of law. At its core is a civil law obligation to make a payment when certain conditions are met. If the participant is an employee and the right to payment is linked to their job, length of service or KPIs, employment law comes into play. If the programme is approved by the company, creates significant obligations or covers the CEO and members of governing bodies, corporate law applies, along with the question of the bodies' competence. And finally, the payment itself has tax consequences.

As a result, a single programme rests on four pillars at once: civil + employment + corporate + tax law.

This is also where the main difficulty with foreign Phantom Stock Plan and Phantom Equity Plan models lies. Translating a document into Russian is not at all the same as translating it into Russian law: a term that is routine in a foreign programme can easily conflict with Russian rules on remuneration for work.

What business will have to work out for itself

The question "are phantom shares allowed in Russia?" is no longer on the table: there is no reason to consider the instrument prohibited. The real question is different — what exactly must a business provide for in its documents to make its programme legally enforceable?

There is no special law to fill the gaps in a programme. This means the following questions risk going unanswered:

• when the participant's right arises;
• whether it can be cancelled;
• what happens on dismissal;
• how the value of a phantom share is determined;
• when the monetary claim arises;
• whether the programme's terms can be changed unilaterally;
• how the payment to an employee should be classified;
• which body of the company is entitled to take the relevant decision.

Some guidance can now be taken from the recommendations of the Bank of Russia and the Ministry of Finance as a description of good practice. Beyond them, the business answers these questions itself — and that is not only an inconvenience. A programme can be built around a specific company, its cycle, ownership structure and cash flow, rather than forcing the business into an average model set by law.

Conclusion

Phantom shares in Russia are in an intermediate position: the law does not recognise them as a stand-alone legal instrument, while the regulators already expressly acknowledge them and describe how they can be structured.

Phantom shares can be used in Russian LLCs and JSCs, but the legal robustness of a particular programme will depend above all on the quality of its structuring. A phantom share in Russia is not a ready-made statutory instrument but a contractual structure that the company has to build itself. That is the source both of flexibility for business and of all the main legal risks — two sides of the same coin.

The direction of travel is clearly right, though. Until recently, phantom shares did not appear in Russian documents at all; today there are detailed recommendations from two government bodies, with indicators, terms, forms of payment and rules for a participant's exit. They are not yet binding on non-public companies, but they already serve as a benchmark that can be cited in discussions with investors, auditors and programme participants themselves.

The next question is how the structure will take root. Western models cannot be transplanted into Russian law word for word — they are adapted gradually, through contractual practice, official guidance and the first court cases. This work is already under way, and we will follow which of the recommendations become established in practice and which eventually make it into the law.

In the second part, we will look at the practical side: how to define vesting and the moment the right to payment arises, what to provide for in case of dismissal, how to calculate the value of a phantom share, and the tax classification of the payment and the uncertainty surrounding it.

Sources

1. Civil Code of the Russian Federation.
2. Labour Code of the Russian Federation.
3. Tax Code of the Russian Federation.
4. Federal Law No. 39-FZ of 22.04.1996 "On the Securities Market".
5. Federal Law No. 208-FZ of 26.12.1995 "On Joint-Stock Companies".
6. Federal Law No. 14-FZ of 08.02.1998 "On Limited Liability Companies".
7. Ministry of Finance Letter No. 03-15-05/58680 of 17.06.2025.
8. Information Letter of the Bank of Russia and the Ministry of Finance No. IN-01-28/9 / 05-08-05/21339 of 17.03.2026.